Issue 37 Autumn 2014

Is capitalism good for the economy?

per cent

Employment

(annual rate of change, left)

Income Share

of the Top 1%

(level, right)

-1

-2

-3

-4

1900

1920

1980

1940

1960

2000

2020

Employment growth and income distribution

(USA: 1900-2013)

Source:

Historical Statistics of the United States, Earliest Times to the Present: Millennial Edition

Management Focus

CAPITALISM

GOOD FOR THE

ECONOMY?

Dr Constantinos Alexiou

, Senior Lecturer in Economics and

Joe Nellis

, Professor of International Management Economics

utility through consumption, then

the accumulation of more capital

and hence more consumption will

ensure that their utilitarian objective is

satisfied.

But Karl Marx reminds us of the

inherent dangers of this self-centered

philosophy: “Accumulation of wealth

at one pole is at the same time

accumulation of misery, agony of toil,

slavery, ignorance, brutality, mental

degradation, at the opposite pole.”

With this mainstream utilitarian

approach there is a real danger

that, whilst trying to achieve the

greatest value from our purchases,

we become obsessed with the notion

that more is better. The contemporary

capitalistic process of accumulation

is intentionally channeled towards the

maximization of personal earnings and

wealth and thus towards a skewed

redistribution of national income.

The concern is that this model of

capitalism may outstrip labour in

terms of an equitable and socially

acceptable share of both income and

assets, thus conferring greater power

on capitalists.

The implications of this potentially

more sinister interpretation of

the capitalists’ objective are of

considerable significance if you take

into account the overall distribution

of income between capitalists

and other groups in society. More

specifically, it can be argued that the

incessant struggle of capitalists to

acquire a larger share of the national

income manifests itself in the current

precarious state of many economies

around the world as a byproduct of

the global financial crisis.

A more refined way of looking at

the power of capitalists is to focus

on what is known as the ‘Top 1%’ –

which includes the world’s highest

earners whose incomes derive

(directly or indirectly) from the use of

capital. It is here that accumulation

and ownership of capital is the

very essence of national income

distribution. The chart depicts the

century-long relationship between

ustained economic growth is generally

regarded as essential to long-term

improvements in living standards. However,

a large volume of theoretical and empirical

research has emerged in recent decades suggesting

that this capitalistic approach may actually represent a

barrier to long-term economic growth.

The findings pose a serious challenge to capitalism and

have attracted heated debate in the post-recession years.

At the heart of this debate there is a fundamental question

that few dare to ask: “Is there an inherent clash between

the power of capitalism and sustainable economic

recovery?”

It might seem absurd to even consider such as a

proposition but, given the implicit elements within

capitalism, we may be warranted to question some of the

conventional wisdom surrounding capital accumulation

(defined simply as the gathering or amassing of objects

of value). It is widely acknowledged within the so-called

‘utilitarian’ framework that capital accumulation plays

an instrumental role in the process of optimizing ‘real

capitalist wealth’. The reason for this is straightforward

- if we assume that capitalists maximize their individual

the income share of the Top 1% of

earners and the annual growth rate of

employment in the USA.

These statistics illustrate that the

growth of capitalism may have been

at the expense of job creation and

consequently long-term economic

growth. Overall, the figures indicate

a negative relationship between

employment growth and the national

income share of the Top 1% in the USA.

They also show that periods

of economic stagnation with

rising unemployment have been

accompanied by increases in the

income share of the Top 1%.

“

There is the danger

that workers and

capitalists are on

track for a head-on

collision.

”

Within the current socio-economic

environment there is the danger that

workers and capitalists are on track

for a ‘head-on collision’, with each

side seeking to increase their relative

share of national income in order to

improve their individual well-being.

This power struggle challenges

whether capitalism is a fair and

self-sustaining economic system

and raises a host of questions for

governments, business and society

when considering whether or not

economic recovery is compatible with

the rising power of capitalism.

For example:

• Will this power struggle lead to

even greater income and wealth

inequalities across the globe?

• What are the implications for

government tax revenues and

national regulations?

• If left to its own devices, will

capitalism deliver the hoped-for

needs and aspirations of society

in terms of living standards, jobs,

equality, etc.?

There is the danger that the growth of

income inequalities across the globe

will result in unmanageable tensions

manifested in the form of strikes, social

unrest and a breakdown of the market

economy which could lead to another

severe global financial crisis. With this

in mind we must think seriously about

the impact of a capitalistic approach to

the global recovery.